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What Is Elasticity? How Elasticity Works. Types of Elasticity. Factors Affecting Demand Elasticity. The Importance of Price Elasticity.
Examples of Elasticity. Elasticity FAQs. The Bottom Line. Key Takeaways Elasticity is an economic measure of how sensitive an economic factor is to another, for example, changes in supply or demand to the change in price, or changes in demand to changes in income.
If demand for a good or service is relatively static even when the price changes, demand is said to be inelastic, and its coefficient of elasticity is less than 1. Examples of elastic goods include clothing or electronics, while inelastic goods are items like food and prescription drugs. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. The language of elasticity can sometimes be confusing. We use the word elasticity to describe the property of responsiveness in economic variables. We also describe the responsiveness as relatively elastic or relatively inelastic. It gets worse. We can also describe elasticity as perfectly elastic or perfectly inelastic.
How to we keep these different meanings understood? That is the purpose of this section. We mentioned previously that elasticity measurements are divided into three main ranges: elastic, inelastic, and unitary, corresponding to different parts of a linear demand curve. Demand is described as elastic when the computed elasticity is greater than 1, indicating a high responsiveness to changes in price.
Computed elasticities that are less than 1 indicate low responsiveness to price changes and are described as inelastic demand. Unitary elasticities indicate proportional responsiveness of demand. In other words, the percent change in quantity demanded is equal to the percent change in price , so the elasticity equals 1. In both cases, the supply and the demand curve are horizontal as shown in Figure 1. While perfectly elastic supply curves are unrealistic, goods with readily available inputs and whose production can be easily expanded will feature highly elastic supply curves.
Examples include pizza, bread, books and pencils. Similarly, perfectly elastic demand is an extreme example. Examples of such goods are Caribbean cruises and sports vehicles. Zero elasticity or perfect inelasticity , as depicted in Figure 2 refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. While a perfectly inelastic supply is an extreme example, goods with limited supply of inputs are likely to feature highly inelastic supply curves.
Examples include diamond rings or housing in prime locations such as apartments facing Central Park in New York City. Similarly, while perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves.
This is the case of life-saving drugs and gasoline. Constant unitary elasticity , in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent. Figure 3 shows a demand curve with constant unit elasticity. It is as if all companies were operating at full capacity and none could invest in the short run.
That way, if the market forces cause an increase in price, the supplied quantities do not increase, as no company can make investments to increase production. In a graph, the supply curve would completely vertical. This fact is called a perfectly inelastic curve. What does it mean if price elasticity of supply equals 0? Microeconomics Supply and Demand Elasticity.
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